An Analysis of Inventory Turnover and Its Impact on Financial Performance in Indian Organized Retail Industry

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INTRODUCTION

Indian organized retail industry is understood to be a key sector of the economy due to plenty of opportunities in the sector. It is understood that the retailers who follow the legal compliances of the business constitute the organised segment of the retailing business. These mainly include the big corporations who operate through a chain of stores. Unorganised retailing is the conventional form of retailing where the investment in business is very low and many a times without a proper brick and mortar setup. Despite plenty of opportunities available for the organised retailing in India, the industry is still in its premature stage. The Indian organised retail business seems to be a minnow when compared with its counterparts in other emerging economies. The reasons for this are multiple in which the primary one is the lack of job opportunities. Another key reason is the low cost of investment in unorganised sector due to which many shops get opened in the residential premises by simple modification of infrastructure. This unorganised setup (Mom and Pop) is commonly referred to as a 'kirana' store in India. Given the low cost of investment and the low portfolio of products and services, the unorganised sector suffers from lack of deployment of technology and business management skills. Entrepreneurial skills are developed over a period of time with rich experience where the expertise of business management evolving from various B-schools is not put to test due to the lack of paying capacity (Guruswamy et.al., 2005). This is due to strong competition in the retail industry, especially in the grocery retail where kiranas and local markets pose a big threat to the organised set up. The "economics of small-format grocery retailing in India" has been misunderstood by Subhiksha (a store brand in the organised retail segment in India), who got cash strapped (The Financial Express, 2009), and the employees didn't get their salaries for several months.

Despite all these issues there are unlimited opportunities supporting the Indian economy as a front runner in the future, for high growth in the organised retail sector. The Indian organized retail industry has the capability to grow along with the growing wealth of the Indian middle class due to their rising disposable income (CII- AT Kearney, 2006) thereby increasing the demand for lifestyle goods.

The last decade saw a great boom in the organised retail industry in India which is attributed to the changing demographics, international brands foraying in India, infrastructure developments, credit availability, usage of latest technology and a world class shopping experience. These factors have forced the retail organisations to focus on branding the offerings, expanding the retail space and organising this operations and processes. This has resulted in demand for an increased efficiency of the supply chain system and thereby making the relationships in the distribution network more intricate. An efficient supply chain will lead to reducing the costs and optimising the inventory (ASA & Associates, 2008).

A very large part of the Indian retail business is unorganised. This unorganised segment limits the choice for the consumer. Moreover, there are enormous ambiguities when an attempt is made to determine its financial and statistical aspects. This thwarts the application of analytical tools pertaining to the store data. It is difficult to calculate the income tax, turnover, net profit, various financial ratios, year-over-year growth and category-wise margin. Also, the aspect of stock replenishment is handled manually and so is the demand forecasting.

Organised segment has done a lot to reduce such shortcomings especially with the usage of the technology. Such players now determine the expected demand, the time to replenish the stock and to purchase the new stock from the supplier, through technoogy supported tools. …